Non-Executive Directors: The Owner Entrepreneur’s Underplayed Ace?

14 Minutes

EIGHT compelling reasons why owner entrepreneurs should consider hiring a non-executive director

If you are seeking to IPO then appointing non-executive directors (NEDs) is a statutory requirement. Likewise, if a private equity house invests in your company, the appointment of a non executive Chairman is typically a deal condition.

In either case, whatever the benefits may be, it’s a non negotiable.

But what if there are no such obligations? Is appointing a NED still an option that you ought to consider to help you along your growth journey?

Our view is that whilst it often takes a catalytic event to precipitate a NED appointment, many owner entrepreneurs and their businesses could reap huge benefits from proactively making a decision to appoint.

In too many scenarios, the NED option remains the owner entrepreneur’s underplayed ace.

Whilst appointing a NED is not right for all businesses, here are eight reasons you might look back on your NED appointment as one of your best ever business decisions:

1) They help you get to the right answer more quickly

I think one of my favourite maxims of all time is:

‘Experience is such a fantastic teacher – shame the lessons are so expensive!’

When your business is growing quickly, the opportunities, choices and challenges that present themselves are numerous. In this context, the brotherly troop of mistakes, detours and missed opportunities can prove both expensive and frustrating.

No-one can be expected to have all the answers. But hiring an experienced NED can help you get to the right answer more quickly.

Their previous experience as both an executive business leader and NED across multiple business contexts and scenarios equips them with an invaluable level of insight, intuition and wisdom. Three priceless things that can help you respond to the challenges and decisions you and the business might be facing.

A NED will have faced the challenges of taking a business through these issues:

People. Financing. Strategy. Scalability. Brand. Product development and innovation. Positioning. Effective communication. Good customers. Bad customers. Difficulties that you couldn’t see coming. Problems that you should have seen coming. Did I mention people? Yes, that definitely needs to be in there more than once. The list goes on.

What’s more, these challenges will have given them a tangible empathy and lived understanding.

As you make your moves, an experienced NED will help you land on more of the ladders and less of the snakes that can too easily trip up growing businesses.

Proactively appointing a NED undoubtedly requires investment. But set against some of the expensive lessons it will help you avoid, it is an investment that can offer an outstanding level of return.

2) Their independence can give you extra insight

Have you ever wondered why it is easier to advise someone else on a tricky issue rather than find the answer when you are in the midst of it yourself?

That feeling of: ‘Why can’t I be that smart when it is me in the hot seat?’.

The truth is, objectivity and independence come with insights all of their own.

When you are the leader in an organisation, heavily immersed in all its issues, you inevitably lose a fair degree of objectivity. This isn’t a criticism. It’s just that if you are one of the lead actors, then it can be difficult to fully assess the play. A view from someone sat elsewhere, less involved day-to-day in the production, can yield valuable insights for you.

A NED will be able to approach things afresh. And with this is likely to bring extra insights:

‘This is what I think might be happening here…’ or, ‘Have we considered this yet…’.

3) They bring strategic clarity and focus

Whilst they can occasionally struggle for cash, I’ve yet to know an entrepreneur struggle for ideas!

The trick is being able to evaluate and execute on those ideas that have real merit. On countless occasions I have seen leaders get distracted by too many ideas or try to execute too many options.

Businesses can subtly but easily drift off course by losing focus on what that they are truly about and where the real market opportunity is.

A good NED will be consumed by asking questions to keep the board focussed:

    What is the company’s strategic objective?
    What are we trying to achieve here?
    Are our actions, decisions and focus reflecting this?
    Do we have an effective plan to achieve our strategic objective?

A NED’s reflective and strategic input can help you stay focussed on objectives and ideas that are aligned with what you want to achieve.

Likewise, your NED will also help you to focus on what you do best.

One of the difficulties that owner entrepreneurs often face as their business grows is feeling like they need to be good at everything, particularly in areas that they are neither gifted or interested in.

Your NED will help take responsibility for the general oversight of the business ensuring critical areas, such as robust financial control, are not being neglected.

They will help you to focus and play to your strengths, whilst ensuring the business doesn’t get out of shape as it grows.

4) They help make your business more investable

A would-be investor is always encouraged by the presence of a NED.

The appointment of a NED sends out an array of positive signals all of which point to the business being a more interesting prospect for them to invest in.

It will also give them greater confidence that:

    The CEO and wider leadership team are open to input and challenge in order to maximise business potential
    If the appointment was made in anticipation of future fundraising, the business is more likely to be investment ready
    The business will be supported by robust controls and internal governance, and will have addressed, or be addressing, issues of scalability for future growth
    High quality financial information and general MI will be available to support and illustrate both current performance and the credibility of future projections
    There will be clear and developed strategic outlook and accountability

Furthermore, if the NED is someone they know or is widely respected in the wider business community, this will also help credentialise the business and help a would-be investor become comfortable with making an investment case for it. After all, a NED will likely not have committed their time and reputation (and potentially money) to an enterprise with questionable substance or viability.

5) They help you maximise value on any exit

If value creation is high on your agenda then this is a key consideration.

Sadly, too many owner entrepreneurs end up ‘leaving money on the table’ by not beginning to prepare for a potential exit early enough.

The road to exit always starts much earlier than most people think.

It is one the key lessons continually fed back to me anecdotally by CEOs of multiple exits, NEDs and corporate finance advisers.

Making key strategic decisions about what the likely value drivers are in the business, including what will be of particular interest to future investors or acquirers, is hugely important. And the earlier this starts the better.

A NED will have been on this journey before, and know what it means to be deal ready.

They will help you to:

    Ensure ongoing clarity and execution of your strategic focus
    Compellingly evidence through several years of high calibre MI/data the narrative and future potential you will be communicating
    Focus on eliminating any weaknesses or gaps that will operate as a price drag or weaken your negotiating position in any sales process
    Maximise profitability and make good key investment decisions
    Successfully navigate the nuances of any sales process
    Select the most appropriate advisers

Unsurprisingly, the longer and more convincingly you can evidence operating as an exciting target acquisition or investment, the higher price you will be able to command when the time comes.

6) They give you peace of mind

Leadership is hard.

Carrying the responsibility for a growing entrepreneurial business is not for the faint hearted.

CEOs can feel this acutely – wrestling with what they do know and sometimes worrying about what they don’t know.

Appointing a NED to support you on your growth journey can not only make you more effective as a leader, but also give you peace of mind to successfully navigate the opportunities and challenges that present themselves.

They can do this by:

    Being a wise, experienced and supportive fellow leader to work through key issues with
    Mentoring you from their own experience to help you maximise your leadership gifting
    Helping keep you focussed on where you add maximum value to the business
    Working with you to identify and resolve experience, resource or skills gaps in the business so it doesn’t get out of shape as it grows
    Identifying and working to resolve areas of risk, inadequate controls or governance to prevent future nasty surprises or avoidable problems

7) They can provide investment as well as insight

Sometimes a NED will invest in your business as well as offering their strategic expertise, experience and contacts.

Indeed some NEDs will only consider opportunities where they can invest as part of their appointment.

This is sometimes referred to as ‘Smart Money’

Whilst this is not appropriate for all businesses, it can be a helpful way of aligning your NED with other key stakeholders whilst also accessing further valuable expansion capital.

And as mentioned earlier, it can also potentially add value to how you are perceived externally when a respected NED has committed their own capital to you and your story.

8) They can bring a valuable network with them

Whilst this shouldn’t be the primary reason you appoint a NED, this can add significant value.

As experienced business professionals, NEDs will typically have built up an extensive network over the years.

They may therefore be able to effect key introductions to potential customers, new allies or partners, better suppliers, suitable investors and finance providers or other contacts able to add something a little extra to your business.

Start building the right story now

As you can see, appointing a NED can bring huge, tangible benefits for a company.

In summary they can:

    Help you get to the right answer more quickly
    Bring extra insight through their independence
    Bring strategic clarity and focus
    Help make your business more investable
    Help maximise value on any exit
    Give you peace of mind
    Provide investment as well as insight
    Bring a valuable network with them